Harsh Realities; (1) FINANCIAL MAIL (2) ANALYSIS

Byline: OLIVER MORGAN

South Africa finally achieved its dream of moving from apartheid state to democracy two years ago. The economy boomed. Foreign investment has poured in by the billion - some 20 billion rand last year alone - and economic growth was moving ahead at a healthy 3.3% a year and rising. With 33 million consumers and a national reconstruction programme, it seemed like the perfect emerging market, and Britain's historic links gave it a golden key to unlock the riches of one of the world's mining treasure houses. Mandela's country seemed set fair for progress. Until now.

Massive currency depreciation, rising interest rates, slashed growth forcasts and a recent net outflow of investor funds have clouded the picture. Financial Mail asks: is the dream over for the Rainbow Nation?

SOUTH Africa was gripped by crisis on February 17. Nelson Mandela, architect of progress to democracy and guarantor of stability, was said to be dying.

South Africa was about to lose its guiding light before his work was even half-finished.

Within a month, however, Mandela was out of hospital, and the reports were proved to be exaggerated. Who, many asked, would do such a thing and imperil the nation's recovery?

John Legat, fund manager at LGT, believes he knows the answer.

`The market started spreading the rumours, and they made money out of it,' he says.

With the American bond market under pressure in February, international investors saw an opportunity for `short selling' South African stocks - selling bonds they did not own, and buying them back at a lower price and a tidy profit. So they stoked up the rumours of Mandela's failing health to speed the fall of the market.

Legat says: `The rumours may well have originated in the bond markets, but even if they did not, traders did their best to emphasise them.'

The bears had arrived. South Africa had joined the global economy, and its fragile electorate was taught a sharp lesson that money talks louder even than the oratory of Mandela himself.

Since then realism has set in with a vengeance.

The rand has depreciated by more than 20% against the US dollar - from 3.62 to 4.48 - wiping a fifth off the value of shares.

Interest rates have been cranked up to protect the currency. The reserve bank raised its rate by a full percentage point three weeks ago and since then there have bee two one-point rises in the commercial rate - taking the cost of borrwing to 20.5%. This has further undermined confidence among business, consumers and the financial markets.

Then last month the finance minister Chris Liebenberg resigned.

He was replaced by the ANC's Trevor Manuel - a political choice which upset the markets, which he described in disparaging terms as `ephemeral'.

As if that were not enough, two weeks ago deputy prime minister F.W. de Klerk pulled his National Party from the Government of National Unity, and moved into opposition.

For investors, who had kept faith through the early spring, this was the last straw. The cashed in more than R22.6 million - the first net divestment for more than a year.

Analysts in London point to an extremely precarious political situation.

One broker, who preferred not to be named, said: `I am surpised the divestment did not come sooner.'

He points not only to the continuing instability caused by the withdrawal of the national party into opposition, but also to unrest in Kwazulu Natal - the stronghold of Chief Buthelezi's Zulu Inkatha Freedom Party, sworn enemies of the ANC.

`Taking these factors together, you have to ask are people going to invest in South Africa as things stand. I think the answer is no.'

Political uncertainty is matched by economic fragility. …

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